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Economics of biofuels Largest cost component: feedstock –58-65% of ethanol production cost in Brazil –At least 70% of cost of biodiesel from Jatropha in India in one preliminary study  Biofuel’s economics stand or fall with agriculture Liberalization of global agricultural trade could increase world feedstock prices –30-40% increase for sugar –Slight increase for maize –Virtually no effect on soybeans

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Brazil’s production cost in mid-2005 of 23-29 US cents per liter is equivalent to $35-50 per barrel of oil, depending on vehicle fuel economy Sugarcane accounts for 58-65% of the cost of ethanol production in Brazil International price of sugar in February 2006 was US$415/ton

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Lessons for other countries Agricultural research, extension, and application by farmers: Critical for lowering production costs Cooperation between cane growers and mill/distillery owners Comprehensive utilization: making use of surplus bagasse, cogeneration Waste reduction: significant reduction in negative environmental impacts associated with cane production (field burning) and ethanol production (stillage disposal)  Countries looking to replicate Brazil’s ethanol experience should assess the factors necessary for success over the long term

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Check list of questions Do climatic conditions favor sugarcane production? Is there good road and communications infrastructure? Is there good agricultural research and extension, or a high probability of strengthening it? Are farmers provided with adequate primary education? Is there a functioning credit market? Is there a cadre of managers that can be called upon to manage the industry? Is the sugar industry organized to foster cooperation across the supply chain for ethanol production? Is there a mechanism for capturing poorly priced externalities?

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Consideration for tax reductions Fuels are an important source of government revenue in developing countries –24% of all customs duty collection, 43% of excise taxes, and 34% of state taxes in India Gasoline tax is progressive Diesel is taxed much less, and hence less room for maneuver It is much better to make fiscal support explicit and subject government support to public debate than to give tax waivers or reductions

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Global carbon market and biofuels Assume 100% GHG offset (20-80% likely) $5-10/t CO 2 -eq in short to medium term equivalent to $0.01-0.035 per liter of biofuel $15-20/t CO 2 -eq over the coming decade equivalent to $0.03-0.07 per liter of biofuel For comparison: range of government support: $0.00 – $0.79 (Germany) per liter for ethanol

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Conclusions Assess the costs and benefits of biofuel programs in a systematic manner and make use of Brazil and other countries’ experiences Where crops are the feedstock, consider implications for the agricultural sector (including small farmers) and spillover effects Recognize fluctuations in world crop prices and risks involved (recent experience in Brazil and Thailand) Consideration may be given to regulatory reserves for biofuels Biofuel trade liberalization would benefit efficient biofuel producers and consumers alike

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Conclusions Be transparent and realistic about the subsidies required for biofuels and how long support may be required Developing country case studies of biofuels programs are needed There is significant long-term potential for bioenergy using new feedstocks and technologies—research programs should be promoted in OECD countries and a handful of the largest developing countries